SECTION 1. Chapter 63 of the General Laws is hereby amended by striking out section 32D and inserting in place thereof the following section:-

                Section 32D. (a) A business corporation subject to an excise under section 32 or 39 which is an S corporation or a qualified subchapter S subsidiary, as defined under section 1361 of the Code, as amended and in effect for the taxable year, shall determine the net income measure of the excise as follows:

                The net income shall be determined by taking into account sub-chapter S of said Code. Income or loss shall be determined as if it were realized or incurred directly by an owner subject to taxation under chapter 62 or 63, as applicable. In the case of an S corporation, income shall be included in the net income measure under this sub-section to the extent that the income is taxed to the S corporation for federal income tax purposes. In the case of a qualified subchapter S subsidiary, income shall be included in the net income measure under this subsection to the extent that the income would have been taxed to the subchapter S subsidiary for federal income tax purposes had it been treated as a separate corporation.

                (b) For purposes of this section, in determining the net income of a qualified subchapter S subsidiary, its gross income shall be determined by computing its gross income as defined under the Code as if it had been taxed as a separate corporation for federal income tax purposes.